Monetary policy decisions are based on
the likely impact future money supply growth
will have on the nation's economic activity.
How much of an increase in the volume of
money is needed to achieve the desired level
of activity depends, however, on how intensively
the stock of money is used—its velocity.
If the rate of money use is expected to change
from what it has been in the past, a different
quantity of money will be needed to maintain
the past level of economic activity. As each
dollar is used more often, fewer dollars are
needed to facilitate the same amount of transactions.
As a first step in determining future
velocity movements, it is useful to analyze the
past.